Industry warns on high gas price hikes

INDUSTRIAL gas users warn that a new regulated price structure for the fuel could spark job losses, massive cost hikes and production shutdowns if the maximum allowed prices are imposed.

Sasol is the biggest supplier of gas to industry.

The Gas Users Group (GUG), which comprises nearly half of Sasol’s external customers and includes companies such as SAB, ArcelorMittal, Consol, Nampak and Mondi, said that its costs could increase by an average of 70% under the new structure if Sasol charged the maximum tariff for which it had applied.

For GUG members, this would translate into an additional cost of more than R1bn next year, assuming the same volume usage as last year.

Next week, energy regulator Nersa is expected to announce the maximum prices that Sasol Gas may charge its various categories of users from March next year, when the current special pricing regime expires.

Nersa regulator member Ethèl Teljeur said that the new pricing structure, which will also regulate transmission tariffs and a trading margin, would lead to price increases for some Sasol customers, although more than 200 customers were expected to see prices drop.

Wrenelle Stander, MD of Sasol Gas, said that while Sasol had acknowledged that some of its customers would face price increases, its actual prices were likely to be lower than the maximum set by Nersa and would take into account the need to retain customers as well as the future sustainability of the local gas industry.

“There is tremendous demand for gas in South Africa, particularly as energy prices continue to rise,” she said. “Further significant infrastructure and upstream investment will be required to meet this growing demand.”

Negotiations with customers would start as soon as the Nersa process was finalised, and the company had proposed to Nersa maximum prices for different customer categories, based on international benchmarks.

For GUG customers who fell into “class five”, for example, Sasol’s proposed maximum price was set at 30% below Nersa’s overall maximum price.

Nersa must first approve maximum prices for each customer category, which in turn must all be below the overall maximum, before Sasol could indicate actual prices for individual customers.

Actual prices for customers would be below the Nersa-approved class maximum, Stander said.

Gas would also be significantly cheaper than electricity.

Sasol said that Eskom’s approved average electricity tariff for the year ending March next year was 65.51c per kilowatt hour (kWh), while the average maximum total charge for gas was estimated at 42.96c/kWh in the 2015 financial year.

The new pricing structure represented a complete overhaul of the current system, where no maximum prices or regulated transmission tariffs were in place for Sasol Gas. Instead, customers were billed based on their “alternative” energy feedstock — this could for example be coal, which would be cheaper, or higher-priced liquefied petroleum gas (LPG).

“Coal alternative customers are typically large consumers and have significantly lower prices than customers who have LPG as an alternative.

“The LPG alternative customers are typically small customers. The Gas Act requires the gas industry to migrate from this customer energy alternative pricing to standard pricing.

“Under the new mechanism, the principle of lower prices for higher volumes will be applied. This means that regardless of a customer’s alternative fuel, the same level of consumption will attract the same price,” said Jacqui O’Sullivan, Sasol spokeswoman.

Ms Teljeur said the current system, which has been in place since 2004 to encourage Sasol’s investment in developing the Pande and Temane gas fields in the south of Mozambique and an 865km pipeline to Secunda, had led to discriminatory pricing.

In some cases, customers using similar volumes in the same area would be charged vastly different prices — a problem that would be avoided under the new pricing structure.

The new structure would use the composition of South Africa’s energy supply to determine a value for the gas molecule, with coal and electricity having the biggest weights of 37% each. Other components included diesel, liquefied petroleum gas and heavy fuel oils.

Critics have slammed the methodology, recommending instead the use of international gas indexes as a benchmark to set maximum prices.

But Ms Teljeur said this was not practical.

A shale gas boom in the US had led to very low prices in the US, for example, while Japan’s decision to switch off nuclear plants and rely more on liquefied natural gas (LNG) had significantly boosted prices.

Unlike crude oil, there was no international price for gas. Cheap US shale gas, which could not be liquefied and transported to South Africa at present, and high prices for LNG in the South Pacific, were not a good indicator for the value of natural gas from Mozambique, said Ms Teljeur. The costs of liquefying, transporting and regassifying gas would have to be factored into these costs.

The GUG, which is in favour of a cost-plus model to set prices, has also criticised the high profit margins that Sasol earns on gas it imports from Mozambique.

The group said Sasol paid an estimated R16.19/GJ for gas molecules last year, and then charged third-party customers an average of R66/GJ. The proposed total charge in Gauteng for class-five customers was R127/GJ, including transmission and distribution tariffs, it said.

“This means the legislation has little if any impact on Sasol’s pricing power,” the GUG said.

“If the current system was put in place to encourage the investment (in Mozambique), it follows that, having had 10 very profitable years to recover the investment, the price should come down now,” it said.

Sasol’s gas business earned an operating margin of 50% in the six months to December, up from 42.8% in 2009, while operating profit totalled R2bn.

Sasol said the price Sasol Gas paid for gas from Mozambique was subject to a long-term contract, with quarterly adjustments based on the movement of a basket of indices. “However, all our agreements are subject to commercial contracts, so it would not be appropriate to disclose the specifics of those contracts,” said Ms O’Sullivan.

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INDUSTRIAL gas users warn that a new regulated price structure for the fuel could spark job losses, massive cost hikes and production shutdowns if the maximum allowed prices are imposed.

Sasol is the biggest supplier of gas to industry.

The Gas Users Group (GUG), which comprises nearly half of Sasol’s external customers and includes companies such as SAB, ArcelorMittal, Consol, Nampak and Mondi, said that its costs could increase by an average of 70% under the new structure if Sasol charged the maximum tariff for which it had applied.

For GUG members, this would translate into an additional cost of more than R1bn next year, assuming the same volume usage as last year.

Next week, energy regulator Nersa is expected to announce the maximum prices that Sasol Gas may charge its various categories of users from March next year, when the current special pricing regime expires.

Nersa regulator member Ethèl Teljeur said that the new pricing structure, which will also regulate transmission tariffs and a trading margin, would lead to price increases for some Sasol customers, although more than 200 customers were expected to see prices drop.

Wrenelle Stander, MD of Sasol Gas, said that while Sasol had acknowledged that some of its customers would face price increases, its actual prices were likely to be lower than the maximum set by Nersa and would take into account the need to retain customers as well as the future sustainability of the local gas industry.

“There is tremendous demand for gas in South Africa, particularly as energy prices continue to rise,” she said. “Further significant infrastructure and upstream investment will be required to meet this growing demand.”

Negotiations with customers would start as soon as the Nersa process was finalised, and the company had proposed to Nersa maximum prices for different customer categories, based on international benchmarks.

For GUG customers who fell into “class five”, for example, Sasol’s proposed maximum price was set at 30% below Nersa’s overall maximum price.

Nersa must first approve maximum prices for each customer category, which in turn must all be below the overall maximum, before Sasol could indicate actual prices for individual customers.

Actual prices for customers would be below the Nersa-approved class maximum, Stander said.

Gas would also be significantly cheaper than electricity.

Sasol said that Eskom’s approved average electricity tariff for the year ending March next year was 65.51c per kilowatt hour (kWh), while the average maximum total charge for gas was estimated at 42.96c/kWh in the 2015 financial year.

The new pricing structure represented a complete overhaul of the current system, where no maximum prices or regulated transmission tariffs were in place for Sasol Gas. Instead, customers were billed based on their “alternative” energy feedstock — this could for example be coal, which would be cheaper, or higher-priced liquefied petroleum gas (LPG).

“Coal alternative customers are typically large consumers and have significantly lower prices than customers who have LPG as an alternative.

“The LPG alternative customers are typically small customers. The Gas Act requires the gas industry to migrate from this customer energy alternative pricing to standard pricing.

“Under the new mechanism, the principle of lower prices for higher volumes will be applied. This means that regardless of a customer’s alternative fuel, the same level of consumption will attract the same price,” said Jacqui O’Sullivan, Sasol spokeswoman.

Ms Teljeur said the current system, which has been in place since 2004 to encourage Sasol’s investment in developing the Pande and Temane gas fields in the south of Mozambique and an 865km pipeline to Secunda, had led to discriminatory pricing.

In some cases, customers using similar volumes in the same area would be charged vastly different prices — a problem that would be avoided under the new pricing structure.

The new structure would use the composition of South Africa’s energy supply to determine a value for the gas molecule, with coal and electricity having the biggest weights of 37% each. Other components included diesel, liquefied petroleum gas and heavy fuel oils.

Critics have slammed the methodology, recommending instead the use of international gas indexes as a benchmark to set maximum prices.

But Ms Teljeur said this was not practical.

A shale gas boom in the US had led to very low prices in the US, for example, while Japan’s decision to switch off nuclear plants and rely more on liquefied natural gas (LNG) had significantly boosted prices.

Unlike crude oil, there was no international price for gas. Cheap US shale gas, which could not be liquefied and transported to South Africa at present, and high prices for LNG in the South Pacific, were not a good indicator for the value of natural gas from Mozambique, said Ms Teljeur. The costs of liquefying, transporting and regassifying gas would have to be factored into these costs.

The GUG, which is in favour of a cost-plus model to set prices, has also criticised the high profit margins that Sasol earns on gas it imports from Mozambique.

The group said Sasol paid an estimated R16.19/GJ for gas molecules last year, and then charged third-party customers an average of R66/GJ. The proposed total charge in Gauteng for class-five customers was R127/GJ, including transmission and distribution tariffs, it said.

“This means the legislation has little if any impact on Sasol’s pricing power,” the GUG said.

“If the current system was put in place to encourage the investment (in Mozambique), it follows that, having had 10 very profitable years to recover the investment, the price should come down now,” it said.

Sasol’s gas business earned an operating margin of 50% in the six months to December, up from 42.8% in 2009, while operating profit totalled R2bn.

Sasol said the price Sasol Gas paid for gas from Mozambique was subject to a long-term contract, with quarterly adjustments based on the movement of a basket of indices. “However, all our agreements are subject to commercial contracts, so it would not be appropriate to disclose the specifics of those contracts,” said Ms O’Sullivan.

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